What is a 'Licensing Agreement'

A licensing agreement is a written agreement by which the owner of a property gives another party permission to use that property under specified parameters. 

BREAKING DOWN 'Licensing Agreement'

Licensing agreements set out the terms under which one party can use property owned by another party. The property involved in a licensing agreement can be real, personal or intellectual, but licensing agreements are most often used for intellectual property. Intellectual property refers to intangible goods such as patents and trademarks for technologies, but also copyrights for written or visual art. 

A typical licensing agreement will define the parties involved and the scope of the intellectual property being licensed. It will specify the ways in which the licensed party can use the property, often limited by geography or a specified time period. Sometimes these agreements will include scaling terms such that new royalty fees will be incurred if the property is reused a certain number of times.

For example, if a book publisher wishes to use a piece of art on the cover of a new book, they will likely have to enter into a licensing agreement with the party that owns the art. The licensing party may agree that the image can be used, but may include certain restrictions in the agreement: that the image not be included in specific advertising campaigns, for example, or that new fees must be paid with every 10,000 copies sold. 

Examples of Licensing Agreements

Licensing agreements are ubiquitous in many industries and individual businesses. Companies using computer software for day-to-day business have entered into licensing agreements with the copyright holders of the software; a McDonald's franchise might have a licensing agreement with McDonald's that allows the franchise to use the company's branding and marketing materials; toys manufacturers have licensing agreements with movie studios to produce action figures based on popular likenesses. Due to how common they are, these agreements are a large part of intellectual property law.

Entering into a Licensing Agreement

The bargaining power of the two parties involved in a licensing agreement is often dependent on the nature of the product. For example, a movie studio licensing the likeness of a popular superhero to an action figure manufacturer might have significant bargaining power in this negotiation, because the manufacturer will benefit hugely from licensing the likeness. 

When entering into a licensing agreement it is advisable to consult an attorney, as there is a deep case history with respect to intellectual property and an individual copyright holder may not understand the restrictions which would need to be put in place in a licensing agreement, or may not include terms which will allow the copyright holder to profit fairly from the licensee's use of the intellectual property.

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